Hovnanian to Acquire Forecast for $225 Million

Home builder Hovnanian Enterprises, moving to claim a bigger stake in the brisk housing market in the Inland Empire, said Wednesday it agreed to acquire Forecast Group in Rancho Cucamonga for about $225 million.

The deal would elevate Hovnanian Enterprises into the ranks of the nation’s 10 largest home builders and make the combined company the second-largest builder in Southern California behind KB Home.

Closely held Forecast, which builds homes largely for first-time buyers, is the second-largest builder in the Inland Empire. Last year, the company delivered 2,139 houses, generating $480 million in revenue and $74.5 million in pretax income.

Hovnanian, which produces higher-priced homes, will control about 45,000 lots after acquiring 8,200 lots from Forecast. Depending on the time of closing, Hovnanian sees the combined entity delivering more than 2,500 homes in California in fiscal 2002.

The acquisition gives the Red Bank, N.J., builder a significant presence in the Inland Empire, site of the largest portion of new homes being built in Southern California, said Jeff Meyers, principal of the Meyers Group real estate research firm.

Hovnanian, currently the nation’s 13th-largest home builder, will pay about $145.5 million in cash and issue $45.5 million of Class A common shares. The company said $49 million of the purchase price will pay for land that the principal owner of Forecast Homes will retain. Hovnanian also will assume about $15 million of Forecast debt.

The purchase would boost Hovnanian’s earnings for the fiscal year ending next October by 50 cents to $3 a share, the company estimated.

Analysts expected the company to post a profit of $2.36 for the year, according to a survey by Thomson Financial/First Call.

Hovnanian shares rose $1.94, or 12% to $18.59. They have gained 54% since they began trading on the New York Stock Exchange in March.

“The reason people will like this acquisition is it makes them [Hovnanian] much bigger in a significant market ... and doesn’t bend the balance sheet out of shape,” UBS Warburg analyst John Stanley said. He rates the stock a buy and doesn’t own shares in the company.

The transaction is expected to close next month, Hovnanian said.

Analysts said this is the latest example of consolidation in the industry.

Major builders often can get lower financing rates for new projects, giving them an edge over smaller companies.

“We expect more mergers like this in the future,” said Randall Lewis, executive vice president of Lewis Operating Co., a major Inland Empire developer that itself was acquired more than three years ago by KB Home.

After the purchase, Hovnanian plans to operate Forecast as a division for buyers of entry-level and moderate-priced houses while Hovnanian’s California division will focus on higher-priced homes and adult communities in Southern California.